When you’re in debt, it can feel like you’re never going to be able to get out. You may feel hopeless and think that there’s no way you’ll ever be able to get a loan. But the truth is, there are a number of things that affect your ability to get a loan – and some of them may surprise you.
It’s essential to get a clear understanding of some of the things that could affect your ability to get a loan. We’ll also give you some tips on how to improve your chances of getting approved for a loan, such as debt consolidation programs.
8 Criteria That Lenders Consider for Credit Approval
There’s much more to getting a loan than your credit score. Your income and where it comes from are a couple of things that can have a major impact on creditworthiness. Also, the relationship between your income and debt plays a significant role.
Let’s dive deeper into eight criteria that can impact how easy it will be for you to qualify for new credit, whether for a home, car, or credit card.
1. Lender Preferences
For starters, every lender is different when it comes to their preferences for extending credit. Some lenders position themselves as the credit-building option, compared with others who always demand impeccable credit.
When you’re trying to get approved for a loan or credit card, it’s good to start by looking into which company is most likely to accept your financial position. Try browsing online forums geared towards financial education and consumer ratings sites. This can help you find the lenders that have the best chance of saying yes.
2. Employment Status
Even if you have a relatively good credit score, your employment status can prevent getting approved for a loan. Being out of work doesn’t necessarily preclude you from loan approval, so long as you’re receiving a stable income, such as a pension or social security. If you’re self-employed, you could run into significant difficulty opening a new credit account. In these cases, banks will usually want to see a longer track record of income, along with far more documentation. Being employed and having paystubs reaching back at least two months will give you the best chance of approval.
3. Time At Employer
Essentially, lenders want to be certain your income will continue through the end of the repayment term, so the more time at your employer, the better.
For the best chances of approval, lenders usually want to see borrowers who’ve been in their job for at least three months. If you’re self-employed, that number could be as long as two years.
4. Debt-To-Income Ratio
Beyond your job history and credit score, one of the leading factors for loan approvals is your debt-to-income ratio. This is the percentage of your income that’s allocated to paying your debts. The lower percentage, the better, as it’s the strongest indication of your ability to make your payments on time every month.
For most lenders, a debt-to-income ratio of 30% or lower is preferred. However, some lenders will allow higher ratios, but a higher interest rate is often the result. Keep in mind, this number is calculated based on your average income and the payment for the new loan.
5. Credit Scores
Banks assess risk using credit scores from three main credit reporting agencies. These scores can range from 350 all the way to 800, with higher numbers being better. There are numerous factors that can affect credit scores, from the length of credit history to payment history.
While many people tend to focus on credit scores, there is much more to getting approved for a loan. The type of credit on the report can sometimes matter just as much.
6. Composition of Credit Accounts
Even if you have a good credit score, the mix of accounts in your credit history may prevent you from getting approved. For example, if the only thing on your reports is credit cards, it could be difficult to get an auto loan.
Similarly, if you’ve never had a home loan, you might have a tougher time with the loan approval. The bottom line is the more varied your credit account mix, the better. That’s because it provides lenders with a complete picture of your ability to repay the debt.
7. Prior Bankruptcy
If you’ve had a bankruptcy in the past, that could spell major trouble for getting approved for a new loan. Much of this factor depends on how long it’s been since the bankruptcy, but the type of bankruptcy matters as well. Chapter 7 bankruptcy is the toughest to recover from, compared with Chapter 13.
That’s because Chapter 13 involves repaying debts, while 7 leaves lenders with nothing. Typically, lenders will want to see more time since a Chapter 7 bankruptcy than 13. However, some lenders will flat-out refuse credit to anyone with bankruptcy on their credit report.
8. Type of Credit You’re Applying For
Lastly, the type of credit you’re applying for matters. For example, student credit cards that are secured are one of the lowest-risk forms of credit for lenders, so these are usually easy to get.
Unsecured credit cards are next on the list, followed by personal loans with collateral to secure the debt. Auto loans can be one of the toughest loans to get, especially if you’ve never had an auto loan before.
That’s because borrowers could simply drive the vehicle to an unknown location to prevent it from being repossessed. Mortgages can be easier than auto loans, despite higher amounts, because mortgage lenders can more easily recoup their money if you fail to pay. The higher the down payment, the easier it will be to get approved for both auto and house loans.
The Path To Getting Approved
Your income situation is often tough to change, making improving your debt-to-income ratio hard. Of course, avoiding bankruptcy is another thing to be mindful of.
So, if you’re struggling to get approved for a loan, sometimes the best route is reducing your debt burden through debt consolidation or a debt settlement.
If this sounds like your situation, getting help from a debt relief company like Alleviate Financial could be the answer. Pick up the phone and talk to one of our debt experts today to learn how debt relief could help you get approved!